An Overvıew Of Shıp Fınance: Buyers, Sellers & The Fınancıers

 

It is a well-known fact that seaborne trade constitutes a considerable portion of world trade, because of its ability to reach all over the world and the reasonable costs when compared to other forms of world trade.  According to statistics, around 90% of world trade is carried out by the international shipping industry.

The 'vessel' or more broadly the 'watercraft', being the main subject of maritime trade, is quite a considerable real interest for all other subjects involved in maritime trade, and indeed it effectively satisfies - most - expectations of the subjects involved in maritime trade within multilateral and complicated relations. While there are countless matters to which a vessel can be a subject, the main topic of this article is the sale, purchase and financing transactions of watercraft.

The legal status of vessels differs in every single jurisdiction. It is obvious that the vessel has to move -preferably ‘to constantly move’-, and accordingly change her location in order to perform her trade which she is assigned for. While the vessel changes location, laws applicable to her relations often change depending on the territorial waters where she was at that time. Therefore, the applicable laws are shaped by the jurisdictions of relevant territorial waters. In this regard, the vessel’s flag state also has an important role over the governing law, particularly when registered interests or maritime liens are involved.

Furthermore, like all sale transactions, a seller and a buyer sign an agreement including all mutually agreed points of the sale as an outcome of their ongoing negotiations over the sale of a vessel. Basically, the seller makes his offer to sell the vessel, and the buyer accepts the same. Thus, the common-will of the parties over sale of the vessel becomes recognized by the legal order. By signing the sale agreement, the seller binds himself with the commitment to sell and deliver, and the buyer binds himself with the commitment to purchase it and take the delivery. The point to note here is that while the exact time and place of delivery of the vessel has already been determined by the sale agreement, the vessel continues to her trade by following her fixed voyages without any interruption. In other words, the seller and the buyer are making preparations for the sale when the vessel’s commercial activity is ongoing.

In most cases, a financing bank -which constitutes another important subject of the sale transactions- is also involved in the sale relation between the seller, buyer and the vessel. The sale of a large number of vessels is partially or completely funded by the financing banks. In this respect the vessel becomes an important interest for the financing bank, and accordingly the bank establishes securities over the vessel recognized by the flag state’s law in consideration of the finance facilities provided by the bank. Moreover, the main security instruments in this regard could be: ship mortgages, assignment of vessel’s earnings, including receivables of the bareboat charters, and assignment of insurances of the vessel.

The vessel terminates its voyage in order to be delivered to the buyer on the agreed time and place of delivery. At the same time, the most important stages of the legal and physical delivery start respectively and /or simultaneously. While the buyer’s financing bank is willing to bind the vessel with securities to be registered to the vessel’s records promptly upon it providing the finance facilities, the seller’s financing bank does not give its consent to release the existing mortgages before the sufficient funds have been received.

At this point, the acts and deeds of the parties and their results, such as payment of the purchase price, receipt of the purchase price, releasing of the registered mortgages, executing and delivery of the vessel’s documents which represent the vessel’s ownership, effecting the physical delivery of the vessel, and registering the new mortgages in favor of the buyer’s financing bank become risk-bearing issues for all parties involved. The most important issue in organizing the transaction from the beginning to the end is to determine the most reasonable and effective solutions by considering the parties’ concerns and interests at each and every stage. Ensuring the legal security of the transaction, proceeding with the suitable payment method for the sale, duly informing all the parties of all the risks, and most of all enabling the parties to make the correct commercial decisions within a legally protected area are the main responsibilities of the legal advisors to the parties. Such a transaction is often concluded through equal sharing of the risk among the parties involved during the process.

In view of the above, it is in the interests of all parties that the vessel's commercial activity continues without any interruption during the sale negotiations. Therefore, it is necessary to avoid losing any time and to work diligently during the whole process from the beginning of the sale negotiations to the completion of the legal and physical delivery. At the end of the day, the clock is ticking, and the ship has to walk on water, not just keep afloat!

For more information please contact:

Ece Birinci, Lawyer

AKT LAW OFFICE – Istanbul

e: ecebirinci@aktlaw.com 

t: +90 212 251 1900